Educational Articles

Getting the Most from the Value Line Stock Commentary

Craig Sirois

Individual company reviews and opinions are published on a quarterly basis in The Value Line Investment Survey. (A game-changing development, such as an acquisition proposal or an earnings surprise, that happens in between regularly scheduled reports will be written up in a supplemental report, which can be found in the closing pages of the weekly release or online sooner.) Often, but not always, the Value Line stock comment will lead off with a recap of the company’s performance in the most recently completed fiscal period. What the reader should glean from this discussion is if there were any surprises or unusual events. For instance, did the company in question significantly exceed or underperform either expectations or year-earlier results, and if so, was that the possible start of a positive or negative trend or simply the consequence of a one-time event. For the most part, though, the commentary should be forward-looking. This is an advantage over many Wall Street stock reports, which come out within hours of a particular firm’s news release, and are, therefore, typically 80% summary (sometimes a nearly word-for-word regurgitation of said release) and 20% interpretation and outlook.

The bold-faced paragraph headings on a Value Line comment provide an outline for the thesis being presented. The casual reader skimming through the pages should be able to glance through the bold sentences and get an idea of whether or not this stock is of interest to him or her as an investor. Words that might strike a chord are many, but include raising (lowering) estimates, volatile, risk averse, conservative, momentum, turn-around play, acquisition, rebound, speculative, spinoff, restructuring, and so forth. The bold-faced sentences should be pithy statements of the most relevant facts, developments, or notions that will determine the company’s direction, earnings potential, and share price. A bold header may also refer to an aspect of the company that may be of special interest to an investor, such as an acquisition strategy, a dividend policy, or perhaps a highly leveraged balance sheet. It may also lead into a discussion of recent share-price action and how that changed the investment appeal.

Reading on, the discussion following the header will expand upon the lead-in. But because Value Line presents a convenient single-page stock report, the writer may not go into too much detail. For example, the topic may be proposed legislation before Congress that, if passed, would affect the company in question. The author may mention the bill, whether or not it is favorable, and its chances of becoming law, without going into the finer points of the proposal, which would likely cloud the decision process, not clarify it. If a certain development affects more than one company in the group, a reader will find a broader discussion of the issue by flipping back to the Industry comment.

The final paragraph of the report is usually the investment conclusion. Recommendations, however, may come at the start of the comment (followed by a discussion backing up the advice) or scattered throughout the report.

Value Line takes a two-pronged approach in analyzing a stock’s attractiveness. First, a Timeliness rank is assigned to each stock (except under unusual conditions), which assesses prospects for relative price performance over the next six to 12 months, a rank of 1 being the Highest and 5 the Lowest. These ranks are not subjectively assigned by the analyst, but instead are based on a proprietary algorithm, based largely on share price and earnings momentum. Therefore, it is mostly based on established performance, and doesn’t take into account potential upcoming events, either positive or negative. Danger signs and/or possible beneficial events will be well covered in the body of the comment, however. Timeliness ranks are an excellent guide for momentum investors and active traders.

Second, Value Line takes a look at the 3- to 5-year price appreciation potential, based (usually) on the analyst’s earnings projections over that time frame and an expectation for the price/earnings multiple. Total-return potential is calculated, as well, by including the dividend yield into the equation.

Quality is also taken into consideration, and a separate algorithm calculates a Safety rank for each stock. This is an important tool that should not be overlooked. A conservative investor, for instance, may want to avoid a stock with a Safety rank of 5, even though it is ranked (Highest) for Timeliness. Along those lines, the health of the balance sheet, cash flow, and overall financial condition are often topics of discussion, as are the cash dividend and share repurchases.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.